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HMRC internal manual

Video Games Development Company Manual

Taxation: profit/loss calculation - income - timing

S1217BA, S1217BD Corporation Tax Act 2009 (CTA 2009)

Where the video game trade of a Video Games Development Company (VGDC) is within the rules in Part 15B CTA 2009 (VGDC20010), income is recognised and expenditure is incurred in line with current accounting principles. This is the case even where the video game expenditure would not be recognised on the profit and loss account because the company is creating a capital asset for exploitation (VGDC20230).

For more details on this matching of income to expenditure see VGDC20250.

This treatment results in profits being recognised as development progresses and not just at completion, unless there are specific contingencies outside the control of the person doing the work.

The underlying principles of revenue and profit recognition are embodied in Financial Reporting Standard 5 (FRS5) ‘Reporting the Substance of Transactions’, in particular FRS5 Application Note G ‘Revenue Recognition’.

This reaffirms the principles contained in Statement of Standard Accounting Practice 9 (SSAP9) ‘Stocks and Long-term Contracts’. This was further clarified by Urgent Issues Task Force Abstract 40 (UITF40) ‘Revenue Recognition and Service Contracts’, the conclusion of which is broadly comparable to the requirements of International Accounting Standard No 18 (IAS18) ‘Revenue’.

IAS18 itself cross refers to IAS 11 ‘Construction Contracts’ and requires the rendering of services to be recognised by reference to the stage of completion of the transaction at the balance sheet date.

The amount of income to be recognised at the end of an accounting period is given by a formula (VGDC20250). This measures the state of completion of the video game by reference to the development expenditure to date compared to the estimated total development expenditure on the video game. We would expect future income to be discounted before being brought into this formula.

When the video game is complete there will generally be no further expected expenditure on its development. If the rights in the video game are sold outright there will also be no further expenditure on its exploitation. All the known estimated income will have been recognised and any further income should be recognised as it is earned.

If the video game is retained and exploited there will be further expenditure on exploitation.